Oil bounces back from the inventory dip to close at cycle highs. What to watch for
WTI up 87-cents to $81.31, Brent up $82 cents to $84.00
That's a new seven-year closing high for WTI and a new three-year closing high for brent. Notably, brent is closing in on the 2018 high of $86.74.
My inclination is to take some off the table ahead of that but when you see price action like today it's tough. The inventory data today was negative with crude supplies growing much more than expected and products drawn at not nearly the pace of the API report. In addition, implied demand took a tumble.
Perhaps there's some one-offs there that I haven't yet heard but it certainly looked like a reason to sell and that's exactly what happened in a drop to $80.37 from $81.25. Yet once again the dip buyers were waiting in the weeds and bid crude all the way back up to $81.40.
CIBC is out with a note today saying the oil markets could be undersupplied if winter is cold.
The EIA estimates that year-end demand could be ~101.1 MMBbl/d vs. supply at 99.9 MMBbl/d (inclusive of the current OPEC+ plan to restore production levels), suggesting further drawdown from global inventories. Current OECD inventories stand at 2,142 MMBbl, which is 115 MMBbl below the five-year historical average. The major factors that we could see driving the oil price higher are: cooler-than-expected temperatures, promoting gas-to-oil switching; further capital discipline from producers; and a faster-than-expected economic recovery post-pandemic. The bar/line chart in Exhibit 2 shows a sensitivity to expected supply and demand projections into next year.